Friday, August 17, 2018
The Court of Appeals for the Eighth Circuit issued an opinion yesterday reversing a Tax Court decision that had rejected the Commissioner’s valuation method in a closely watched transfer-pricing case, announced Principal Deputy Assistant Attorney General Richard E. Zuckerman and Deputy Assistant Attorney General Travis A. Greaves of the Justice Department’s Tax Division. Download Medtronic_opinion
In Medtronic, Inc. & Consolidated Subsidiaries v. Commissioner, No. 17-1866, the Eighth Circuit held that the Tax Court had rejected the Commissioner’s transfer-pricing method, and adopted that of the taxpayer, without first engaging in the analysis required under Treasury’s transfer-pricing regulations. Because the Tax Court failed to make the necessary factual findings under those regulations, the Eighth Circuit was unable to determine whether the court “applied the best transfer pricing method for calculating an arm’s length result or whether it made proper adjustments under its chosen method.” Accordingly, it vacated the Tax Court’s order and remanded the case for further consideration by the Tax Court.
Principal Deputy Assistant Attorney General Zuckerman thanked Tax Division attorneys Richard Farber and Judith Hagley, who handled the case on appeal for the government.
Additional information about the Tax Division and its enforcement efforts may be found on the division’s website.
Thursday, August 9, 2018
Wednesday, August 8, 2018
The Treasury Department and the Internal Revenue Service today issued proposed regulations on the new 100-percent depreciation deduction that allows businesses to write off most depreciable business assets in the year they are placed in service.
The proposed regulations, available today in the Federal Register, implement several provisions included in the Tax Cuts and Jobs Act (TCJA),
The 100-percent depreciation deduction generally applies to depreciable business assets with a recovery period of 20 years or less and certain other property. Machinery, equipment, computers, appliances and furniture generally qualify.
The deduction is retroactive, applying to qualifying property acquired and placed in service after Sept. 27, 2017. The proposed regulations provide guidance on what property qualifies for the deduction and rules for qualified film, television, live theatrical productions and certain plants.
For details on claiming the deduction or electing out of claiming it, see the proposed regulations or the instructions to Form 4562, Depreciation and Amortization (Including Information on Listed Property).
Taxpayers who elect out of the 100-percent depreciation deduction must do so on a timely-filed return. Those who have already filed their 2017 return and either did not claim the mandatory deduction on qualifying property, or did not elect out but still wish to do so, will need to file an amended return.
Treasury and IRS welcome public comment, and the proposed regulations provide details on how to submit comments.
Tuesday, August 7, 2018
The Internal Revenue Service issued guidance today on new tax law changes that allow small business taxpayers with average annual gross earnings of $25 million or less in the prior three-year period to use the cash method of accounting.
The Revenue Procedure outlines the process that eligible small business taxpayers may obtain automatic consent to change accounting methods that are now permitted under the Tax Cuts and Jobs Act, or TCJA.
The TCJA, enacted in December 2017, expands the number of small business taxpayers eligible to use the cash method of accounting and exempts these small businesses from certain accounting rules for inventories, cost capitalization and long-term contracts. As a result, more small business taxpayers will be allowed to change to cash method accounting starting after Dec. 31, 2017.
The Department of the Treasury and the Internal Revenue Service welcome public comments on future guidance. For details on submitting comments, see the Revenue Procedure.
Wednesday, August 1, 2018
IRS and Treasury issue proposed regulations implementing repatriation tax of 15.5% on cash and 8% on assets on deferred offshore earnings under new IRC Section 965
The Internal Revenue Service and the Department of the Treasury today issued proposed regulations on section 965 of the Internal Revenue Code. The proposed regulations affect United States shareholders, as defined under section 951(b) of the Code, with direct or indirect ownership in certain specified foreign corporations, as defined under section 965(e) of the Code. Download Prop reg 965 repatriation tax
Section 965, enacted in December 2017, levies a transition tax on post-1986 untaxed foreign earnings of specified foreign corporations owned by United States shareholders by deeming those earnings to be repatriated. For domestic corporations, foreign earnings held in the form of cash and cash equivalents are generally intended to be taxed at a 15.5 percent rate for 2017 calendar years, and the remaining earnings are intended to be taxed at an 8 percent rate for 2017 calendar years.
The lower effective tax rates applicable to section 965 income inclusions are achieved by way of a participation deduction set out in section 965(c) of the Code. A reduced foreign tax credit also applies with respect to the inclusion under section 965(g) of the Code.
Taxpayers may generally elect to pay the transition tax in installments over an eight-year period under section 965(h) of the Code. The proposed regulations contain detailed information on the calculation and reporting of a United States shareholder’s section 965(a) inclusion amount, as well as information for making the elections available to taxpayers under section 965.
New content is available on the CbC Reporting pages:
- The Jurisdiction Status Table contains recently signed Competent Authority Arrangements for the exchange of CbC Reports.
- The Country-by-Country Reporting Guidance webpage contains new guidance and resources.
Wednesday, July 25, 2018
Global Forum publishes tax transparency compliance ratings for seven jurisdictions and welcomes three new members
The Global Forum on Transparency and Exchange of Information for Tax Purposes (the Global Forum), published today seven peer review reports assessing compliance with the international standard on tax transparency and exchange of information on request (EOIR).
These reports assess jurisdictions against the updated standard which incorporates beneficial ownership information of all legal entities and arrangements, in line with the definition used by the Financial Action Task Force Recommendations.
Two jurisdictions – Guernsey and San Marino – received an overall rating of “Compliant.” Four others – Indonesia, Japan, the Philippines and the United States were rated “Largely Compliant.” Kazakhstan was rated “Partially Compliant.” The jurisdictions have demonstrated their progress on many deficiencies identified in the first round of reviews. Main challenges in this second round are associated with ensuring the availability of beneficial ownership information, an element of the standard that was strengthened in 2016.
The Global Forum is the leading multilateral body mandated to ensure that jurisdictions around the world adhere to and effectively implement the international tax transparency standards both the standard of exchange of information on request and the standard of automatic exchange of information. This objective is achieved through a robust monitoring and peer review process. The Global Forum also runs an extensive technical assistance programme to provide support to its members in implementing the standards and helping tax authorities to make the best use of cross-border information sharing channels.
The Global Forum also welcomed three new countries into its membership – Bosnia and Herzegovina, Cabo Verde and Swaziland. This takes its membership to 153 members who have come together to cooperate in the international fight against cross border tax evasion.
For additional information on the Global Forum, its peer review process, and to read all reports to date, go to: http://www.oecd-ilibrary.org/taxation/global-forum-on-transparency-and-exchange-of-information-for-tax-purposes-peer-reviews_2219469x.
Tuesday, July 24, 2018
Treasury Department and IRS Announce Significant Reform to Protect Personal Donor Information to Certain Tax-Exempt Organizations
Policy Relieves Burdens on Taxpayers While Preserving Transparency
The Treasury Department and IRS announced that the IRS will no longer require certain tax-exempt organizations to file personally-identifiable information about their donors as part of their annual return. The revenue procedure released today does not affect the statutory reporting requirements that apply to tax-exempt groups organized under section 501(c)(3) or section 527, but it relieves other tax-exempt organizations of an unnecessary reporting requirement that was previously added by the IRS.
Nearly fifty years ago, Congress directed the IRS to collect donor information from charities that accept tax-deductible contributions. That statutory requirement applies to the majority of tax-exempt organizations, known as section 501(c)(3) organizations, receiving contributions that can be claimed by donors as charitable deductions. This policy provided the IRS information that could be used to confirm contributions to those organizations.
By regulation, however, the IRS extended the donor reporting requirement to all other tax-exempt organizations—labor unions and volunteer fire departments, issue-advocacy groups and local chambers of commerce, veterans groups and community service clubs. These groups do not generally receive tax deductible contributions, yet they have been required to list the names and addresses of their donors on Schedule B of their annual returns (Form 990).
“Americans shouldn’t be required to send the IRS information that it doesn’t need to effectively enforce our tax laws, and the IRS simply does not need tax returns with donor names and addresses to do its job in this area,” said U.S. Treasury Secretary Steven T. Mnuchin. “It is important to emphasize that this change will in no way limit transparency. The same information about tax-exempt organizations that was previously available to the public will continue to be available, while private taxpayer information will be better protected. The IRS’s new policy for certain tax-exempt organizations will make our tax system simpler and less susceptible to abuse.”
Summary of New IRS Policy
- Tax-exempt organizations described by section 501(c), other than section 501(c)(3) organizations, are no longer required to report the names and addresses of their contributors on the Schedule B of their Forms 990 or 990-EZ.
- These organizations must continue to collect and keep this information in their records and make it available to the IRS upon request, when needed for tax administration.
- Form 990 and Schedule B information that was previously open to public inspection will continue to be reported and open to public inspection.
- The Internal Revenue Code expressly governs the tax-return reporting of donor information by charities that primarily receive tax-deductible contributions (under section 501(c)(3)) and political organizations (under section 527). The IRS action today does not affect those organizations.
After careful review, Treasury and the IRS have decided to relieve these tax-exempt organizations (other than organizations described in section 501(c)(3) or section 527) of a requirement that Congress never imposed for several reasons:
- First, the IRS makes no systematic use of Schedule B with respect to these organizations in administering the tax code. Donor information for many of these organizations was once relevant to the federal gift tax, but Congress eliminated that need in 2015 by making gifts to many of these tax-exempt organizations tax-free. The IRS has no tax administration need for continuing the routine collection of donor names and addresses as part of an exempt organization’s annual tax return. If the information is needed for purposes of an examination, the IRS will be able ask the organization for it directly.
- Second, the new policy will better protect taxpayers by reducing the risk of inadvertent disclosure or misuse of confidential information—an especially important safeguard for organizations engaged in free speech and free association protected by the First Amendment. Unfortunately, the IRS has accidentally released confidential Schedule B information in the past. In addition, conservative tax-exempt groups were disproportionately impacted by improper screening in the previous Administration, including what the Treasury Inspector General for Tax Administration concluded were inappropriate inquiries related to donors. Ending the unnecessary collection of sensitive donor information will reinforce the reforms already implemented by the IRS in the wake of the political targeting scandal and enhance public trust in the agency.
- Third, the new policy will save both private and government resources. On the taxpayer side, the previous policy added needless paperwork. On the government side, the IRS has been forced to devote scarce resources to redacting donor names and addresses (as required by federal law) before making Schedule B filings public. Now, the IRS will no longer require personally-identifiable donor information that the IRS does not regularly need and the public does not see. The public information will continue to be available, just as before.
The IRS’s new policy will relieve thousands of organizations of an unnecessary regulatory burden, while better protecting sensitive taxpayer information and ensuring appropriate transparency.
Monday, July 23, 2018
|Tax Facts Team|
|William H. Byrnes, J.D., LL.M
Tax Facts Author
|Richard Cline, J.D.
Senior Director, Practical Insights
|Robert Bloink, J.D., LL.M.
Tax Facts Author
|Jason Gilbert, J.D.
|Alexis Long, J.D.
|Connie L. Jump
Senior Manager, Editorial Operations
Senior Editorial Assistant
Friday, July 20, 2018
State aid: Commission opens in-depth investigation into tax exemptions for companies in the Madeira Free Zone
The European Commission has opened an in-depth investigation to examine whether Portugal has applied the Madeira Free Zone regional aid scheme in conformity with the 2007 and 2013 Commission decisions approving it.
In particular, the Commission has concerns that tax exemptions granted by Portugal to companies established in the Madeira Free Zone are not in line with the Commission decisions and EU State aid rules.
Commissioner Margrethe Vestager, in charge of competition policy, said: "Our regional aid rules are particularly flexible when it comes to supporting the EU's outermost regions, including Madeira. Under these rules, fiscal aid can only be granted if it contributes to the creation of real economic activity and jobs in the assisted region. We will now investigate whether the Zona Franca Madeira fiscal aid scheme approved by the Commission in the past has been applied correctly by Portugal."
The Madeira Free Zone
The Madeira Free Zone (Zona Franca da Madeira, “ZFM”) was created by Portugal in 1987 to support economic development in its outermost region Madeira. The ZFM's objective is to attract investment to and create jobs in Madeira.
In this context, Portugal put in place a regional aid scheme providing support to companies establishing themselves in the ZFM through:
- corporate income tax reductions on profits resulting from activities performed in Madeira; and
- other tax reductions, such as an exemption from municipal and local taxes, as well as exemption from transfer tax payable on real estate for setting up a business in the ZFM.
The Commission approved successive versions of the ZFM regional aid scheme under EU State aid rules on several occasions between 1987 and 2014.
EU State aid rules provide ample scope for Member States to support the economic development of outermost regions, such as Madeira, and to address the structural challenges of companies active in such regions.
At the same time, in order for such measures to be fit for purpose, State aid must be granted exclusively to companies generating economic activity and real jobs in the outermost regions. That is why under the approved ZFM regional aid scheme, the amount of aid granted to companies through corporate income tax reductions or other tax reductions is linked to the number of jobs that they create in Madeira.
The Commission's investigation
As part of its standard monitoring of the implementation of State aid decisions, the Commission has carried out a preliminary assessment of how Portugal applied the ZFM aid scheme until its expiry at the end of 2014, taking into account the framework of the 2007 and 2013Commission decisions approving the scheme.
At this stage, the Commission has concerns that the Portuguese authorities may have failed to respect some of the basic conditions under the 2007 and 2013 decisions. In particular, the Commission has doubts that Portugal complied with the requirements that:
- the company profits benefitting from the income tax reductions originated exclusively from activities carried out in Madeira; and
- the beneficiary companies actually created and maintained jobs in Madeira.
The Commission will now investigate further to find out whether its initial concerns are confirmed. The opening of an in-depth investigation gives Portugal and interested third parties an opportunity to submit comments. It does not prejudge the outcome of the investigation.
Each year, the Commission selects a number of State aid measures in order to monitor whether Member States implement them in compliance with EU State aid rules. In this context, the Commission asked Portugal for information on the implementation of the ZFM scheme in 2012 and 2013.
The scheme in question expired at the end of 2014. Portugal has informed the Commission that, since 2015, it has implemented a similar aid scheme on the basis of the 2014 General Block Exemption Regulation (GBER). Under this Regulation, Member States can implement regional operating aid schemes for companies established in outermost regions, without notification and approval by the Commission, as long as certain conditions are respected.
Article 349 of the Treaty on the Functioning of the European Union acknowledges the special characteristics of the outermost regions and affords them a special status. All outermost regions, including Madeira, have been granted special regional aid status to help address their specific handicaps - remoteness, insularity, small size, difficult topography and climate, economic dependence on few products.
In recognition of the serious nature of the structural disadvantages that the companies located in these regions face, the Commission has established specific State aid rules for the outermost regions, within both the Regional Aid Guidelines and the GBER.
In particular, these regions are all automatically considered assisted areas where the economic situation is extremely unfavourable in relation to the rest of the European Union as a whole. Due to this status, all companies with economic activity in these areas may benefit from additional bonuses of up to 20% on top of the normal regional investment aid ceilings. Additionally, Member States can provide operating aid to companies located in these regions to compensate them for the additional costs they are facing in these remote regions.
The non-confidential version of the decision will be made available under the case number SA.21259 in the State aid register on the Commission's competition website once any confidentiality issues have been resolved. New publications of state aid decisions on the internet and in the Official Journal are listed in the State Aid Weekly e-News.
Thursday, July 19, 2018
This measure increases the tax assessment time limit for non-deliberate offshore non-compliance. The time limit will be increased to 12 years for Income Tax, Capital Gains Tax and Inheritance Tax. A consultation with a summary of responses about Extension of offshore time limits is also available.
Who is likely to be affected
This measure will only have an impact on individuals, trustees or others liable to Income Tax, Capital Gains Tax or Inheritance Tax on offshore income, gains or chargeable transfers who have made errors that are not deliberate or otherwise covered by the longer 20 year assessment time limit.
General description of the measure
This measure increases the tax assessment time limit for non-deliberate offshore non-compliance. The time limit will be increased to 12 years for Income Tax, Capital Gains Tax and Inheritance Tax. This increases the existing time limits of 4 years, or 6 where the loss of tax is due to carelessness, after the end of the year of assessment (or date of the chargeable transfer) to which it relates.
Where the taxpayer has sought to deliberately evade tax, the time limit will remain 20 years.
The government is determined to ensure that all UK taxpayers pay the tax they owe, and that offshore non-compliance is identified and investigated before assessment time limits expire. The extended time limits will provide HMRC with more time to access the information needed to understand offshore transactions, calculate the tax due, detect any errors and ensure the correct Income Tax, Capital Gains Tax or Inheritance Tax is paid.
This measure will help HMRC ensure everyone pays all the tax they owe, and addresses the risk that some taxpayers avoid a full investigation or assessment because of the time taken to gather facts on offshore structures and investments, which may not have been declared for many years, and can be very complex.
Background to the measure
The government announced that the assessment time limit for non-deliberate offshore tax non-compliance will be increased to at least 12 years at Autumn Budget 2017.
HMRC issued a public consultation on the details of this reform on 19 February 2018. This consultation closed on 14 May 2018. The response to the consultation and the draft legislation were published on 6 July 2018.
These amendments will have effect in relation to Income Tax and Capital Gains Tax assessments from 2013 to 2014 in cases where the loss of tax is brought about carelessly, and from 2015 to 2016, and subsequent years, for other cases (where not already subject to the 20 year time limit). They will apply for Inheritance Tax to chargeable transfers taking place on or after 1 April 2013 where the loss of tax is brought about carelessly, and 1 April 2015 for other cases not subject to a longer time limit. The amendments will have effect when Finance Bill 2018-19 receives Royal Assent.
The existing time limits are set out in Part IV of the Taxes Management Act 1970 for Income Tax and Capital Gains Tax, and in Part VIII of the Inheritance Tax Act 1984 for Inheritance Tax.
Legislation will be introduced in Finance Bill 2018-19 to amend the Taxes Management Act 1970 through the insertion of a new section 36A, and the Inheritance Tax Act 1984 will be amended through the insertion of a new section 240B.
These amendments will provide for extended time limits where offshore Income Tax, Capital Gains Tax or Inheritance Tax is lost. Taxpayers’ appeal rights are unaffected.
Summary of impacts
Exchequer impact (£m)
|2017 to 2018||2018 to 2019||2019 to 2020||2020 to 2021||2021 to 2022||2022 to 2023|
These figures are set out in Table 2.1 of Autumn Budget 2017 as ‘Offshore Time Limits: extend to prevent non-compliance’ and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Budget 2017.
This measure is not expected to have any significant macroeconomic impacts.
Impact on individuals, households and families
This measure will only have an impact on individuals with offshore income, gains or assets who have made non-deliberate errors. These individuals may receive an assessment of tax as a result of the increase of the time limit to 12 years. There will be a negligible impact on individuals and households.
This measure is not expected to impact on family formation, stability or breakdown.
It is expected that any groups affected by the extended time limits are likely to have above average wealth. The government does not anticipate there will be adverse impacts on any group sharing protected characteristics.
Impact on business including civil society organisations
This measure will impact on businesses with offshore income, gains or chargeable transfers who have made non-deliberate errors. Businesses and individuals may receive an assessment of tax as a result of the increase of the assessing time limit to 12 years. This measure is expected to have a negligible impact on business admin burdens as statutory record-keeping requirements remain unchanged.
Organisations will need to determine how long they should hold on to information in light of the new time limits and will need to have robust data protection policies whether they hold information for 4 years, 20 years or any period in between.
One-off costs may include familiarisation with the new rules. On-going costs may include additional interaction with HMRC as a result of the increased time limit.
Tuesday, July 17, 2018
William H. Byrnes, J.D., LL.M. and Robert Bloink, J.D., LL.M.
Tax Reform's Stock Deferral Option Remains Unpopular
Many have speculated that the deferral option remains unpopular because companies are required to allow at least 80 percent of employees to participate under a written plan. Further, the company's ability to buy back to the stock if advantageous is restricted. Because of a lack of guidance on the rules governing the new Section 83(i) deferral election, many employers are not willing to risk the potential penalties associated with the rules should Treasury interpret the provision differently. For more information on the rules governing the Section 83(i) election, visit Tax Facts on Investments Online and Read More.
IRS Officials Note Potential Need for Additional Accumulated Earnings Tax Guidance
The 2017 tax reform legislation lowered the corporate tax rate from 35 percent to 21 percent, potentially providing motivation for some companies to convert to C corporation status rather than attempt to interpret the complicated pass-through provisions that apply post-reform. However, the legislation did not modify the accumulated earnings tax, which applies a 20 percent penalty tax to undistributed corporate earnings and profits in excess of the reasonable business needs of the company. This "reasonableness" standard can be difficult to interpret and could require additional guidance in the coming year. For more information on the accumulated earnings tax, visit Tax Facts Online and Read More.
Avoiding Modification on a Series of Substantially Equal IRA Payments
Clients can avoid the early distribution penalty on pre-age 59 1/2 distributions from IRAs if the distributions are received as part of a series of substantially equal payments. However, to continue avoiding the 10 percent early distribution penalty, the series of substantially equal payments cannot be modified. Further, the owner cannot modify the amount of the installment payments that he or she receives pursuant to the payment plan. The owner must abide by these restrictions until the end of the payment term, which is the later of five years or the date the owner reaches age 59 1/2. For more information on the IRA early distribution penalty, visit Tax Facts Online and Read More.
Tax Court Rules Unemployment Compensation Subject to Back Pay Agreement Was Compensation
In this case, the taxpayer was terminated from employment, and his union challenged the termination. In arbitration, it was found that the taxpayer was wrongly terminated, and the employer was ordered to pay any back pay that the taxpayer should have received during the period of unemployment, less any amounts that the taxpayer received relating to his loss of employment (i.e., the unemployment compensation). The taxpayer argued that he should not have to include the unemployment compensation in income, because it was deducted from the back pay to which he was otherwise entitled. The court disagreed, finding that the unemployment compensation did, in fact, constitute taxable income. For more information on items that are included in income, visit Tax Facts Online and Read More.
For questions, contact Customer Service at 1-800-543-0874.
Wednesday, July 11, 2018
Based on international audits completed between 2014 to 2015 and 2016 to 2017, almost $1 billion in income was uncovered and assessed from 370 individuals, 200 corporations and a small number of trusts. The additional tax identified was $284 million. Of this, 23% was attributed to individuals and 77% to corporations and trusts linked to those corporations.
The Government of Canada is working to ensure a tax system that is fair for all Canadians. Building on that commitment, today the Honourable Diane Lebouthillier, Minister of National Revenue, announced the release of the fourth study of the tax gap in Canada which focuses on individuals’ international income tax compliance. Download Canada Offshore CRA report
The approach of the study is based on methodologies developed by international experts. According to the most recent study, the estimate for the offshore investment tax gap for individuals was between $0.8 billion and $3 billion in 2014, or between 0.6% and 2.2% of individual income tax revenue. Canada is the first G7 country to study the offshore tax gap. In previous studies, the tax gaps for personal income tax and the federal portion of the goods and services tax / harmonized sales tax were estimated at up to $14.6 billion in 2014.
The studies conducted to date underline the importance of examining not only individuals, but also their related entities when investigating non-compliance. The Government of Canada's recent Budget 2016, 2017, and 2018 investments in the fight against tax evasion and aggressive tax avoidance will further support this approach and promote enhanced information sharing among the Canada Revenue Agency (Agency) and its international partners.
With these investments, the Government is delivering better data, better approaches and better results. Furthermore, the Agency has the capacity to leverage new global collaboration and data sharing to crack down on tax cheating.
New approaches include being able to automatically access and review all international electronic funds transfers over $10,000 entering or leaving the country, allowing us to better risk assess individuals and businesses. The Agency has also improved its audit capacity to focus on high net worth taxpayers and thanks to the Common Reporting Standard is gaining easier access to information on Canadians’ overseas bank accounts.
The Agency's next tax gap study will be released in 2019 and will focus on incorporated businesses.
"Most Canadians pay their fair share of taxes. They expect their government to do all it can to pursue people and businesses that try to avoid doing the same. This latest study of the tax gap is evidence of our Government's ongoing commitment to better target international tax evasion and aggressive tax avoidance."
– The Honourable Diane Lebouthillier, Minister of National Revenue
The Agency describes the tax gap as the difference between the taxes that would be paid if all obligations were fully met in all cases and the taxes that are actually received and collected.
Each year, the CRA processes about 29 million income tax and benefit returns and assesses about $180 billion in individual federal income taxes.
Based on international audits completed between 2014 to 2015 and 2016 to 2017, almost $1 billion in income was uncovered and assessed from 370 individuals, 200 corporations and a small number of trusts. The additional tax identified was $284 million. Of this, 23% was attributed to individuals and 77% to corporations and trusts linked to those corporations.
In 2014, about $429 billion in assets, $9 billion in foreign income and $13 billion in capital gains were reported. Top countries where assets were held and foreign income was reported tended to be the U.S. and the U.K.
Canada is one of over 65 nations sharing Country-by-Country Reports (CbCRs). CbCRs provide automatic access to information about multinational corporations’ activities in every country they operate in, giving us a deeper understanding of the operations of these large companies.
- This year, we are also gaining easier access to information on Canadians’ overseas bank accounts, with the implementation of the Common Reporting Standard. With this new system, Canada and close to 100 other countries will begin exchanging financial account information. This information will help us connect the dots and identify instances where Canadians hide money in offshore accounts to avoid paying taxes.
- Backgrounder - Tax gap estimates in Canada
- International Tax Gap and Compliance Results for the Federal Personal Income Tax System
- Tax Assured and Tax Gap for the Federal Personal Income Tax System
- Tax Gap in Canada: A Conceptual Study
- Estimating and Analyzing the Tax Gap Related to the Goods and Services Tax / Harmonized Sales Tax
- Video: Minister Lebouthillier tables fourth report on the Tax Gap
Monday, July 9, 2018
This change is significant and has important implications in at least three situations.
First, it closes a longstanding loophole by reducing the amount of foreign source income used by U.S. taxpayers in their foreign tax credit limitation computations.
Second, multinationals using profit shifting structures may also be affected, including those that are U.S.-based and others that are foreign-based such as U.S.-based multinationals that have inverted. A number of multinationals have fact patterns that may cause an unacknowledged partnership for U.S. tax purposes with both U.S. and foreign group members as partners. Where this is the case, some portion of the profits shifted into zero-or low-taxed foreign group member partners may be subject to U.S. taxation under the effectively connected income (ECI) rules. In such cases, the new sourcing rule should cause the amount of ECI to be increased since all gross income will be attributed to the place of manufacture. Further, some portion of the profits in these foreign group members not caught by ECI taxation may be taxable under the subpart F manufacturing branch rule.
Third, this new sourcing rule provides foreign based entities selling manufactured products into the U.S. with a clear roadmap as to how they may avoid U.S. tax on those sales. Presently, many, if not most, foreign based manufacturers selling products in the U.S. establish U.S. subsidiaries to conduct their U.S. sales/distribution operations. This is in contrast to the use of a sales branch. With the new sourcing rule, the use of a sales branch may carry substantial tax benefits since no part of the gross income from inbound sales will be subject to ECI taxation. This in turn may encourage foreign manufacturers to adopt profit shifting structures using hybrid entities that could avoid tax in both the country of manufacture and the country of sale (i.e., the U.S.). If this occurs, the Treasury and the IRS may need to promulgate new rules and regulatory approaches to prevent such double non-taxation.
With the change of this sourcing rule, it is possible that Treasury and the IRS will take the opportunity to modernize Reg §1.863-3 and other related rules to reflect not only this TCJA change but also modern business models using contract manufacturers and other mechanisms rarely used or unknown decades ago when the existing regulations were issued. This article makes a number of suggestions, and emphasizes that any new rules should be consistent with Reg §1.954-3(a)(4)(iv), which was amended effective from 2009 to focus on contract manufacturing business models for purposes of Subpart F.
Friday, July 6, 2018
The Taxpayer Advocate, Nina Olson, wrote:
“What exactly can the IRS do to help sharing economy participants comply with their tax obligations?” If we operate under the premise that most taxpayers want to comply with the law, the IRS needs to expand its presence within the sharing economy to enable that compliance. In my 2017 Annual Report to Congress, I described several ways the IRS can provide improved taxpayer service to this growing sector.
Read her response and analysis on the National Taxpayer Advocate blog
IRS' Electronic Tax Administration Advisory Committee issues 2018 annual report: Cyber Security and Tax Information
The Electronic Tax Administration Advisory Committee (ETAAC) today released its annual report, featuring numerous recommendations on a range of issues in electronic tax administration.
The Committee presented the report at a public meeting to IRS Acting Commissioner David Kautter.
"The ETAAC works closely with the Security Summit in the fight against identity theft and refund fraud,” Kautter said. “The group’s advice is important to our efforts to improve tax administration, and the IRS looks forward to reviewing the recommendations.”
ETAAC exists in support of the goal that paperless filing should be the preferred and most convenient method of filing tax and information returns. This is the Committee’s second annual report since it was realigned and expanded to focus on refund fraud and cybersecurity.
While the ETAAC makes recommendations to the IRS, it works in conjunction with the Security Summit, a joint effort of the IRS, state tax administrators, tax software providers, tax professionals and financial services firms to fight fraud. Summit efforts have resulted in sharp declines in the number of taxpayer reports of identity theft and refund fraud.
ETAAC members represent various segments of the tax community, including tax professionals, tax software developers, large and small businesses, employers and payroll service providers, individual taxpayers and consumer advocates, the financial industry and state and local governments.
The 2018 report Electronic Tax Administration Advisory Committee Annual Report to Congress, is available on IRS.gov.
Australia Revenue Publishes New Guidance: identifying where a company's central management and control is located
Income tax: central management and control test of residency: identifying where a company's central management and control is located
What this draft Guideline is about
1. This draft Guideline contains practical guidance to assist foreign incorporated companies and their advisors to apply the principles set out in TR 2018/5 Income tax: central management and control test of residency. This will help these companies determine whether they are resident under the central management and control test of company residency in subsection 6(1) of the Income tax Assessment Act 1936 (ITAA 1936).
2. This draft Guideline must be read in conjunction with TR 2018/5, which sets out the Commissioner's views on the meaning of central management and control, and the principles relevant to determining whether a company incorporated outside Australia is a resident under the central management and control test of residency.
3. The examples and guidance contained in this draft Guideline are general in nature. They cannot, and do not, cover every possible circumstance relevant to determining whether a company is resident, or non-resident, under the central management and control test of company residency.
4. Foreign incorporated companies who are unsure whether they are resident after having considered TR 2018/5 and this draft Guideline are encouraged to approach the ATO to discuss their circumstances.
5. This draft Guideline does not deal with the associated questions of:
- the voting power test of company residency for foreign incorporated companies1, or
- when a company carries on business.
Monday, July 2, 2018
Letter to IRS & Treasury in Response to Notice 2018-43 RE 2018-2019 PRIORITY GUIDANCE PLAN by Jeffery Kadet
The letter provides extensive and specific suggestions for a number of international tax areas including:
-- Sourcing rules (§§863 and 864 in particular),
-- Entity classification rules (Reg §301.7701-1(a)(2)),
-- Subpart F manufacturing branch rule (Reg §1.954-3(b)), and
-- Application of tax treaties (Reg §1.894-1(d)).
Thursday, June 28, 2018
National Taxpayer Advocate Nina E. Olson today released her statutorily mandated mid-year report to Congress that presents a review of the 2018 filing season, identifies the priority issues the Taxpayer Advocate Service (TAS) will address during the upcoming fiscal year and contains the IRS’s responses to each of the 100 administrative recommendations the Advocate made in her 2017 Annual Report to Congress.
The most significant challenge the IRS faces in the upcoming year is implementing the Tax Cuts and Jobs Act of 2017 (TCJA), which among other things requires programming an estimated 140 systems, writing or revising some 450 forms and publications and issuing guidance on dozens of TCJA provisions. Ms. Olson expresses confidence that the IRS will implement the law successfully. “Make no mistake about it. I have no doubt the IRS will deliver what it has been asked to do,” she writes in the preface to the report.
However, she reiterates her longstanding concern that IRS funding reductions have undermined the agency’s ability to provide high-quality taxpayer service and to modernize its aging information technology infrastructure. The report points out that IRS funding has been reduced by 20 percent since fiscal year (FY) 2010 on an inflation-adjusted basis. “Because of these reductions, the IRS doesn’t have enough employees to provide basic taxpayer service,” the report says. “The compliance and enforcement side of the house has been cut by even more. So in addition to answering the fewest number of taxpayer calls in recent memory, the IRS also has the lowest individual audit rate in memory (0.6 percent) and its collection actions are way down.”
Taxpayer service challenges
In her preface to the report, Ms. Olson focuses on the IRS’s customer service challenges. The report says the IRS utilizes narrow performance measures that suggest the agency is performing well but do not reflect the taxpayer experience. For example, the IRS reports it achieved a “Level of Service” on its toll-free telephone lines of 80 percent during the 2018 filing season, which is widely understood to mean IRS telephone assistors answered 80 percent of taxpayer calls. In fact, the report points out IRS telephone assistors answered only 29 percent of the calls the IRS received. Similarly, the IRS reports it achieved a customer satisfaction level of 90 percent on its toll-free lines during FY 2017. Yet the report points out that the IRS only surveyed the subset of taxpayers whose calls were answered by telephone assistors and completed.
President’s Management Agenda and customer service. The President’s Management Agenda for 2018 emphasizes the importance of high-quality customer service. It says: “Federal customers . . . deserve a customer experience that compares to – or exceeds – that of leading private sector organizations,” and it cites data from the American Customer Satisfaction Index (ACSI) and the Forrester U.S. Federal Customer Experience Index as key benchmarks. Notably, those indices found the IRS performs poorly relative to other federal agencies.
The ACSI report for 2017 ranks the Treasury Department 12th out of 13 Federal Departments and says the Treasury Department’s score is effectively an IRS score because “most citizens make use of Treasury services via the [IRS] tax-filing process.”
For its part, the Forrester report says that federal agencies, on average, score considerably lower than the private sector. Within the federal government, Forrester assessed 15 agencies and ranked the IRS near the bottom of the pack:
- The private sector average score for overall “Customer Experience (CX)” is 69, the federal agency average score is 59 and the IRS’s score is 54 out of 100, which the Forrester report characterized as “very poor.” This placed the IRS 12th out of 15 rated agencies.
- In the category of “Comply with Directives and Advice,” Forrester found that “for every 1-point increase in an agency’s CX Index score, 2.0% more customers will do what the organization asks of them. . . Just 61% of Internal Revenue Service (IRS) customers say that they follow its rules, which shows that not even the threat of jail and fines always outweighs the power of a bad customer experience.”
- In the category of “Inquire for Official Information,” Forrester found that “when a federal agency’s CX Index score rises by 1 point, 2.5% more customers are likely to seek its authoritative advice or expertise. . . [T]he IRS inspires a mere 13% of its customers to seek its expertise.” That is less than half the federal agency average of 32 percent.
- In the category of “Speak Well of Federal Agencies,” Forrester found that “as a federal agency’s CX Index score improves by 1 point, 4.4% more customers will say positive things about the organization. . . The IRS lagged other agencies again, as a mere 24% of its customers said that they would speak well of it.” This placed the IRS last among the 15 federal agencies ranked and at about half the federal agency average of 47 percent.
- In the category of “Trust Agencies,” Forrester found that “[e]ach time a federal agency’s CX Index score rises by 1 point, 2.8% more customers will trust the organization. . . [J]ust 20% of customers say that they trust the IRS.” Again, this placed the IRS last among the 15 federal agencies ranked and at half the federal agency average of 40 percent.
- In the category of “Forgive Agencies That Make Mistakes,” Forrester found that “[f]or every 1-point increase in an agency’s CX Index score, 2.7% more customers are willing to forgive the agency when it makes mistakes. . . [O]nly 22% of IRS customers said that they would forgive it for an error.” Again, this placed the IRS last among the 15 federal agencies ranked and at about half the federal agency average of 40 percent.
“The significant cuts to the IRS’s budget combined with the need to implement several significant new laws in recent years has stretched the IRS very thin,” Ms. Olson writes. “But the ACSI and Forrester reports show that taxpayers are not being well served. The aptly named Taxpayer First Act, which the House passed on a unanimous 414-0 vote in April, would direct the IRS to develop a comprehensive customer service strategy within one year. That’s an important step in the right direction. I have also recommended that Congress provide the IRS with more funding along with more oversight – and I will encourage the next Commissioner to make customer service improvements a top priority.”
Select recommendations to improve customer service. The report highlights recommendations the National Taxpayer Advocate has made to improve customer service, including the following:
- Adopt robust performance measures that more accurately reflect the taxpayer experience, such as “First Contact Resolution” – a widely used measure in the private sector. If the IRS adopts better measures, it will gain a better understanding of where it needs to focus its efforts to improve customer service.
- Provide taxpayers with modernized “omnichannel” services so that taxpayers can obtain assistance online, by phone or in-person. In recent years, the IRS has been pushing taxpayers to use online services, and its recently adopted FY 2018-2022 Strategic Plan even includes a performance measure to gauge the agency’s success at getting taxpayers to use “self-assistance service channels . . . versus needing support from an IRS employee.” Thus, the agency itself is striving for less personal contact with taxpayers, even though 41 million taxpayers do not have broadband service in their homes to access the Internet and even though only about 30 percent of taxpayers who attempt to create online accounts are able to do so because of the IRS’s rigorous authentication requirements. The IRS is right to prioritize data security, the report says, but the inability of most taxpayers to create online accounts underscores the importance of high-quality telephonic and in-person services.
- Accelerate the development of an integrated case management system. Today, the IRS maintains at least 60 separate case management systems that house different items of taxpayer data and cannot be centrally accessed. As a result, customer service representatives are often unable to access information when taxpayers call, and IRS employees often must check multiple systems to get complete information. The inability to access complete taxpayer data on an integrated system also limits the utility of online taxpayer accounts, as taxpayers often will need to call to request information they are not able to see.
- Use “big data” to help taxpayers as well as to bolster enforcement. The IRS regularly uses technology to help identify fraud and noncompliance, but it should also use technology more frequently to minimize harm to taxpayers. For example, the IRS uses filters to detect and stop fraudulent tax returns, but the filters have unacceptably high false-positive rates of more than 60 percent, delaying refunds for hundreds of thousands of legitimate taxpayers. The IRS can do more to refine its filters. The IRS can also do more to use information reporting documents to identify taxpayers who are at risk of economic hardship and therefore should be exempt from collection actions by the IRS and private debt collection agencies.
Priority issues for 2019
The report identifies and discusses 12 priority issues TAS plans to focus on during the upcoming fiscal year. The top five, described briefly above, include implementation of the TCJA, the effectiveness of IRS service channels in meeting taxpayer needs, the development of an integrated case management system, the impact of high false-positive rates on legitimate taxpayers and the protection of taxpayers facing financial hardship from IRS and private debt collection activities.
Volume 2: IRS responses to Taxpayer Advocate
The National Taxpayer Advocate is required by statute to submit a year-end report to Congress that, among other things, describes at least 20 of the most serious problems facing taxpayers and makes administrative recommendations to mitigate those problems. The report released today includes a second volume containing the IRS’s general responses to each of the problems the Advocate identified in her 2017 year-end report, as well as specific responses to each recommendation. In addition, it contains TAS’s analysis of the IRS’s responses and, in some cases, details TAS’s disagreement with the IRS’s position.
Overall, the Advocate made 100 administrative recommendations in her 2017 year-end report, and the IRS has implemented or agreed to implement 35 of the recommendations, or 35 percent. The agreed implementation rate is slightly lower than last year’s. Out of 93 administrative recommendations proposed in the Advocate’s 2016 year-end report, the IRS implemented or agreed to implement 35 recommendations, or 38 percent.
“Both people who work in the field of tax administration and taxpayers generally can benefit greatly from reading the agency responses to our report,” Ms. Olson said. “Tax administration is a complex field with many trade-offs required. Reading both my office’s critique and the IRS’s responses in combination will provide readers with a broader perspective on key issues, the IRS’s rationale for its policies and procedures, and alternative options TAS recommends.”
New TAS website to help taxpayers understand tax reform changes
In light of the Tax Cuts and Jobs Act, TAS has launched a new website, Tax Reform Changes, that lists key tax return items under current law (2017), shows which ones have been impacted by the TCJA and illustrates how the changes will be reflected on tax year 2018 returns filed in 2019. Taxpayers can navigate the website by viewing key tax return topics or seeing them illustrated on a 2017 Form 1040. The line-by-line explanations allow taxpayers to see how the new law may change their tax filings and to consider how to plan for these changes. The website will incorporate updated information as it becomes available. Taxpayers and professionals can sign up to receive email notifications when updates occur. If a taxpayer determines the TCJA will impact his or her tax liability, he or she should make withholding adjustmentsby filing a new Form W-4, Employee’s Withholding Allowance Certificate, with employers.